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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

or

 

o                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to               

 

Commission File No. 000-51754

 

 

CROCS, INC.

(Exact name of registrant as specified in its charter)

 

 

7477 East Dry Creek Parkway Niwot, Colorado 80503

(Address, including zip code, of registrant’s principal executive offices)

 

(303) 848-7000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Act). Yes o   No x

 

As of July 25, 2013, Crocs, Inc. had 91,592,995 shares of its $0.001 par value common stock outstanding.

 

 

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Crocs, Inc.

Form 10-Q

Quarter Ended June 30, 2013

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PART I — Financial Information
Item 1.	Financial Statements	2
	Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012	2
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012	3
	Unaudited Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39
PART II — Other Information
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	42
Signatures		43

 

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PART I — Financial Information

 

ITEM 1. Financial Statements

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
($ thousands, except per share data)		2013			2012			2013			2012
Revenues		$	363,827		$	330,942		$	675,483		$	602,740
Cost of sales		162,960			134,857			308,767			261,856
Gross profit		200,867			196,085			366,716			340,884
Selling, general and administrative expenses		150,246			124,718			278,445			229,009
Asset impairment		202			106			202			819
Income from operations		50,419			71,261			88,069			111,056
Foreign currency transaction (gains) losses, net		814			(1,627		)	3,414			2,649
Interest income		(517		)	(549		)	(823		)	(907		)
Interest expense		266			132			475			179
Other (income) expense, net		195			(520		)	167			(761		)
Income before income taxes		49,661			73,825			84,836			109,896
Income tax expense		14,305			12,301			20,519			20,026
Net income		$	35,356		$	61,524		$	64,317		$	89,870
Net income per common share (Note 11):
Basic		$	0.40		$	0.68		$	0.73		$	1.00
Diluted		$	0.40		$	0.68		$	0.72		$	0.99

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
($ thousands)		2013			2012			2013			2012
Net income		$	35,356		$	61,524		$	64,317		$	89,870
Other comprehensive income (loss):
Foreign currency translation		(6,250		)	(11,523		)	(10,567		)	(4,445		)
Reclassification of cumulative foreign exchange translation adjustments to net income, net of tax of $0, $0, $(3), and $7, respectively		—			—			299			(658		)
Total comprehensive income		$	29,106		$	50,001		$	54,049		$	84,767

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		June 30,			December 31,
($ thousands, except number of shares)		2013			2012
ASSETS
Current assets:
Cash and cash equivalents		$	289,354		$	294,348
Accounts receivable, net of allowances of $16,918 and $13,315, respectively		162,263			92,278
Inventories		160,763			164,804
Deferred tax assets, net		5,628			6,284
Income tax receivable		12,307			5,613
Other receivables		17,293			24,821
Prepaid expenses and other current assets		31,051			24,967
Total current assets		678,659			613,115
Property and equipment, net		88,770			82,241
Intangible assets, net		64,082			59,931
Deferred tax assets, net		33,283			34,112
Other assets		54,167			40,239
Total assets		$	918,961		$	829,638
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	76,666		$	63,976
Accrued expenses and other current liabilities		90,963			81,371
Deferred tax liabilities, net		2,388			2,405
Income taxes payable		25,363			8,147
Current portion of long-term borrowings and capital lease obligations		3,031			2,039
Total current liabilities		198,411			157,938
Long term income tax payable		32,129			36,343
Long-term borrowings and capital lease obligations		6,899			4,596
Other liabilities		13,913			13,361
Total liabilities		251,352			212,238
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred shares, par value $0.001 per share, 5,000,000 shares authorized, none outstanding		—			—
Common shares, par value $0.001 per share, 250,000,000 shares authorized, 91,565,533 and 88,345,143 shares issued and outstanding, respectively, at June 30, 2013 and 91,047,297 and 88,662,845 shares issued and outstanding, respectively, at December 31, 2012		92			91
Treasury stock, at cost, 3,220,390 and 2,384,452 shares, respectively		(56,343		)	(44,214		)
Additional paid-in capital		316,111			307,823
Retained earnings		398,329			334,012
Accumulated other comprehensive income		9,420			19,688
Total stockholders’ equity		667,609			617,400
Total liabilities and stockholders’ equity		$	918,961		$	829,638

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended June 30,
($ thousands)		2013			2012
Cash flows from operating activities:
Net income		$	64,317		$	89,870
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,522			17,257
Unrealized loss on foreign exchange, net		1,392			4,892
Provision for doubtful accounts, net		1,340			1,563
Share-based compensation		7,540			6,129
Other non-cash items		935			1,197
Changes in operating assets and liabilities:
Accounts receivable		(75,124		)	(50,762		)
Inventories		(923		)	(38,163		)
Prepaid expenses and other assets		(13,460		)	(16,115		)
Accounts payable		12,385			(545		)
Accrued expenses and other liabilities		12,551			17,552
Income taxes		6,266			16,847
Cash provided by operating activities		37,741			49,722
Cash flows from investing activities:
Cash paid for purchases of property and equipment		(19,676		)	(16,312		)
Proceeds from disposal of property and equipment		545			319
Cash paid for intangible assets		(11,833		)	(4,501		)
Restricted cash		(1,295		)	(654		)
Cash used in investing activities		(32,259		)	(21,148		)
Cash flows from financing activities:
Proceeds from bank borrowings		14,572			89,505
Repayment of bank borrowings and capital lease obligations		(11,334		)	(90,578		)
Issuances of common stock		1,439			1,531
Purchase of treasury stock		(12,533		)	—
Repurchase of common stock for tax withholding		(256		)	(493		)
Cash used in financing activities		(8,112		)	(35		)
Effect of exchange rate changes on cash		(2,364		)	(7,299		)
Net decrease in cash and cash equivalents		(4,994		)	21,240
Cash and cash equivalents—beginning of period		294,348			257,587
Cash and cash equivalents—end of period		$	289,354		$	278,827
Supplemental disclosure of cash flow information—cash paid during the period for:
Interest		$	525		$	273
Income taxes		$	10,658		$	10,551
Supplemental disclosure of non-cash, investing, and financing activities:
Assets acquired under capitalized leases		$	61		$	—
Accrued purchases of property and equipment		$	2,715		$	1,762
Accrued purchases of intangibles		$	1,803		$	397

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. GENERAL

 

Organization - Crocs, Inc. and its subsidiaries (collectively the “Company,” “we,” “our” or “us”) are engaged in the design, development, manufacturing, marketing and distribution of footwear, apparel and accessories for men, women and children.

 

Basis of Presentation & Summary of Significant Accounting Policies - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, these statements do not include all of the information and disclosures required by GAAP or SEC rules and regulations for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting solely of normal recurring matters) considered necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

 

These statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”). The accounting policies used in preparing these unaudited condensed consolidated financial statements are the same as those described in Note 1 — “Organization and Summary of Significant Accounting Policies” to the consolidated financial statements in the 2012 Form 10-K.

 

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates, judgments and assumptions made when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, sales returns and discounts, impairment assessments and charges, recoverability of assets (including deferred tax assets), uncertain tax positions, share-based compensation expense, useful lives assigned to long-lived assets, depreciation and provisions for contingencies are reasonable based on information available at the time they are made. Management also makes estimates in the assessments of potential losses in relation to threatened or pending legal and tax matters (see Note 12 — “Commitments & Contingencies” and Note 14 — “Legal Proceedings”). Actual results could materially differ from these estimates. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss.

 

Noncontrolling Interests - As of June 30, 2013, all of our subsidiaries were, in substance, wholly owned.

 

Accumulated Other Comprehensive Income - Activity within our accumulated other comprehensive income (“AOCI”) balance consists solely of gains and losses resulting from the translation of foreign subsidiary financial statements to our reporting currency. Foreign currency translation resulting in changes to other comprehensive income and related reclassification adjustments are presented net of tax effects on the condensed consolidated statements of other comprehensive income. Foreign currency reclassification adjustments are included within the line item entitled ‘Foreign currency transaction gains (losses), net’ on the condensed consolidated statements of income.

 

Recently Adopted Accounting Standards

 

In March 2013, the FASB issued ASU No. 2013-05 Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU No. 2013-05”). This pronouncement provides clarification around the release of any cumulative translation adjustment related to when the parent ceases to have controlling financial interest in a business or group of assets held within a foreign entity. This pronouncement was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2013. The Company adopted the provisions of ASU No. 2013-05 for its fiscal year beginning January 1, 2013. The provisions of ASU No. 2013-05 did not have a material impact on to the Company’s condensed consolidated financial statements.

 

Recently Issued Accounting Standards

 

In July 2013, the FASB issued ASU No. 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU No. 2013-11”). This pronouncement provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This pronouncement is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2013. The Company will adopt the provisions of ASU No. 2013-11

 

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on January 1, 2014. We do not anticipate the provisions of ASU No. 2013-11 to have a material impact on to the Company’s condensed consolidated financial statements.

 

2. INVENTORIES

 

The following table summarizes inventories by major classification as of June 30, 2013 and December 31, 2012:

 

($ thousands)		June 30, 2013			December 31, 2012
Finished goods		$	149,045		$	155,833
Work-in-progress		720			911
Raw materials		10,998			8,060
Inventories		$	160,763		$	164,804

 

3. PROPERTY & EQUIPMENT

 

The following table summarizes property and equipment by major classification as of June 30, 2013 and December 31, 2012:

 

		June 30,			December 31,
($ thousands)		2013			2012
Machinery and equipment		$	70,704		$	68,713
Leasehold improvements		96,530			88,653
Furniture, fixtures and other		23,872			20,827
Construction-in-progress		9,465			8,766
Property and equipment, gross (1)		200,571			186,959
Less: Accumulated depreciation (2)		(111,801		)	(104,718		)
Property and equipment, net		$	88,770		$	82,241

(1)         Includes $0.2 million and $0.1 million of certain equipment held under capital leases and classified as equipment as of June 30, 2013 and December 31, 2012, respectively.

(2)         Includes $0.1 million and $0.1 million of accumulated depreciation related to certain equipment held under capital leases as of June 30, 2013 and December 31, 2012, respectively, which are depreciated using the straight-line method over the lease term.

 

During the three months ended June 30, 2013 and 2012, we recorded $5.9 million and $6.0 million, respectively, in depreciation expense of which $0.8 million and $1.1 million, respectively, was recorded in ‘Cost of sales’, with the remaining amounts recorded in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of income. During the six months ended June 30, 2013 and 2012, we recorded $12.0 million and $11.5 million, respectively, in depreciation expense of which $1.6 million and $2.6 million, respectively, was recorded in ‘Cost of sales’, with the remaining amounts recorded in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of income.

 

We periodically evaluate all of our long-lived assets for impairment when events or circumstances would indicate the carrying value of a long-lived asset may not be fully recoverable. During the three and six months ended June 30, 2013, we recorded $0.2 million of asset impairment charges related to certain underperforming domestic stores in the Americas segment that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over the remaining economic life of those assets. During the three and six months ended June 30, 2012, we recorded $0.1 million and $0.8 million, respectively, of asset impairment charges related to certain underperforming domestic stores in the Americas segment that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over the remaining economic life of those assets.

 

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4. GOODWILL & INTANGIBLE ASSETS

 

The following table summarizes the goodwill and identifiable intangible assets as of June 30, 2013 and December 31, 2012:

 

		June 30, 2013									December 31, 2012
($ thousands)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Capitalized software		$	99,339	(1)	$	(41,774	)(2)	$	57,565		$	87,426	(1)	$	(33,933	)(2)	$	53,493
Customer relationships		6,858			(6,193		)	665			7,145			(6,222		)	923
Patents, copyrights, and trademarks		6,428			(3,852		)	2,576			6,161			(3,522		)	2,639
Core technology		4,622			(4,622		)	—			4,856			(4,856		)	—
Other		1,485			(1,002		)	483			670			(636		)	34
Total finite lived intangible assets		118,732			(57,443		)	61,289			106,258			(49,169		)	57,089
Indefinite lived intangible assets		102			—			102			113			—			113
Goodwill		2,691			—			2,691			2,729			—			2,729
Intangible assets		$	121,525		$	(57,443	)	$	64,082		$	109,100		$	(49,169	)	$	59,931

(1)         Includes $4.1 million of software held under a capital lease classified as capitalized software as of June 30, 2013 and December 31, 2012.

(2)         Includes $1.6 million and $1.3 million of accumulated amortization of software held under a capital lease as of June 30, 2013 and December 31, 2012, respectively, which is amortized using the straight-line method over the useful life.

 

During the three months ended June 30, 2013 and 2012, amortization expense recorded for intangible assets with finite lives was $4.4 million and $3.0 million, respectively, of which $1.6 million and $0.8 million, respectively, was recorded in ‘Cost of sales’, with the remaining amounts recorded in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of income. During the six months ended June 30, 2013 and 2012, amortization expense recorded for intangible assets with finite lives was $8.5 million and $5.8 million, respectively, of which $3.2 million and $1.6 million, respectively, was recorded in ‘Cost of sales’, with the remaining amounts recorded in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of income.

 

The following table summarizes estimated future annual amortization of intangible assets as of June 30, 2013:

 

		Amortization
Fiscal years ending December 31,		($ thousands)
Remainder of 2013		$	10,995
2014		11,243
2015		11,130
2016		11,091
2017		10,895
Thereafter		5,935
Total		$	61,289

 

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5. ACCRUED EXPENSES & OTHER CURRENT LIABILITIES

 

The following table summarizes accrued expenses and other current liabilities as of June 30, 2013 and December 31, 2012:

 

		June 30,			December 31,
($ thousands)		2013			2012
Accrued compensation and benefits		$	22,789		$	19,714
Professional services		16,370			13,588
Sales/use and VAT tax payable		15,982			12,444
Fulfillment, freight and duties		15,414			8,621
Accrued rent and occupancy		11,291			10,226
Entrusted loan payable(1)		—			7,943
Other(2)		9,117			8,835
Total accrued expenses and other current liabilities		$	90,963		$	81,371

(1)         A corresponding entrusted loan receivable of $7.9 million is recorded in ‘Prepaid expenses and other current assets’ as of December 31, 2012 as amounts are related to our subsidiaries in China. The entrusted loan was paid in full during the second quarter of 2013 and as such, the entrusted loan payable, and corresponding receivable, was removed from the balance sheet as of June 30, 2013.

(2)         The amounts in ‘Other’ consist of various accrued expenses and no individual item accounted for more than 5% of the total balance at June 30, 2013 or December 31, 2012.

 

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6. FAIR VALUE MEASUREMENTS

 

Recurring Fair Value Measurements

 

The following tables summarize the financial instruments required to be measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012:

 

		Fair Value as of June 30, 2013
		Quoted prices in			Significant
		active markets			other			Significant
		for identical			observable			unobservable
		assets or liabilities			inputs			inputs
($ thousands)		(Level 1)			(Level 2)			(Level 3)			Total			Balance Sheet Classification
Cash equivalents		$	79,837		$	—		$	—		$	79,837		Cash and cash equivalents
Derivative assets:
Foreign currency contracts		—			14,879			—			14,879			Prepaid expenses and other current assets and other assets
Derivative liabilities:
Foreign currency contracts		$	—		$	295		$	—		$	295		Accrued expense and other current liabilities

 

		Fair Value as of December 31, 2012
		Quoted prices in			Significant
		active markets			other			Significant
		for identical			observable			unobservable
		assets or liabilities			inputs			inputs
($ thousands)		(Level 1)			(Level 2)			(Level 3)			Total			Balance Sheet Classification
Cash equivalents		$	14,800		$	—		$	—		$	14,800		Cash and cash equivalents
Derivative assets:
Foreign currency contracts		—			5,548			—			5,548			Prepaid expenses and other current assets and other assets
Derivative liabilities:
Foreign currency contracts		$	—		$	295		$	—		$	295		Accrued expense and other current liabilities

 

Non-Recurring Fair Value Measurements

 

The majority of our non-financial instrument assets, which include inventories, property and equipment and intangible assets, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment and the carrying value is not recoverable, the carrying value would be adjusted to the lower of its cost or fair value and an impairment charge would be recorded.

 

7. DERIVATIVE FINANCIAL INSTRUMENTS

 

We transact business in various foreign countries and are therefore exposed to foreign currency exchange rate risk inherent in revenues, costs, and monetary assets and liabilities denominated in non-functional currencies. We have entered into foreign currency exchange forward contracts and currency swap derivative instruments to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities, and of future cash flows caused by changes in foreign currency exchange rates. We do not designate these derivative instruments as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, these instruments are recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in ‘Foreign currency transaction (gains) losses, net’ in our condensed

 

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consolidated statements of income. For purposes of the condensed consolidated statement of cash flows, we classify the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, generally within ‘Cash provided by (used in) operating activities’. See Note 6 — “Fair Value Measurements” for further details regarding the fair values of the corresponding derivative assets and liabilities.

 

The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts at June 30, 2013 and December 31, 2012. The notional amounts of the derivative financial instruments shown below are denominated in their U.S. dollar equivalents and represent the amount of all contracts of the foreign currency specified. These notional values do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the foreign currency exchange risks.

 

		June 30,			December 31,
($ thousands)		2013			2012
Foreign currency exchange forward contracts by currency:
Japanese Yen		$	117,250		$	112,500
Pound Sterling		15,945			8,742
Mexican Peso		15,007			11,400
Singapore Dollar		9,000			—
Euro		4,854			5,159
Australian Dollar		4,271			4,178
Russian Ruble		4,036			—
Swedish Krona		1,989			—
New Zealand Dollar		1,756			1,137
South African Rand		1,741			—
Hong Kong Dollar		902			—
Total notional value, net		$	176,751		$	143,116
Latest maturity date		December 2015			December 2015

 

The following table presents the amounts affecting the consolidated statements of income from derivative instruments for the three and six months ended June 30, 2013 and 2012:

 

		Three Months Ended June 30,						Six Months Ended June 30,						Location of (Gain) Loss Recognized in Income
($ thousands)		2013			2012			2013			2012			on Derivatives
Derivatives not designated as hedging instruments:
Foreign currency exchange forwards(1)		$	(710	)	$	4,287		$	(10,651	)	$	2,184		Foreign currency transaction (gains) losses, net

 

(1)         For the three and six months ended June 30, 2013, the net gains of $0.7 million and $10.7 million, respectively, associated with our foreign currency exchange forwards were offset by net unrealized and realized losses resulting from foreign currency transactions of $1.5 million and $14.1 million, respectively, resulting in net foreign currency transaction losses of $0.8 million and $3.4 million, respectively. For the three months ended June 30, 2012, the net loss of $4.3 million associated with our foreign currency exchange forwards was offset by net unrealized and realized gains resulting from foreign currency transactions of $5.9 million resulting in a net foreign currency transaction gain of $1.6 million. For the six months ended June 30, 2012, the net loss of $2.2 million associated with our foreign currency exchange forwards and net loss of $0.4 million associated with net unrealized and realized gains resulting from foreign currency transactions resulting in a net foreign currency transaction loss of $2.6 million.

 

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8. BANK BORROWINGS & CAPITAL LEASE OBLIGATIONS

 

Bank borrowings and capital lease obligations as of June 30, 2013 and December 31, 2012 consist of the following:

 

		June 30,			December 31,
($ thousands)		2013			2012
Bank borrowings(1)		$	9,834		$	6,582
Capital lease obligations for equipment bearing interest rates ranging from 5.3% to 73.3% and maturities through 2016		96			53
Total bank borrowings and capital lease obligations		$	9,930		$	6,635

(1)         Bank borrowings represent the outstanding debt balance related to three separate notes payable issued by PNC Equipment Finance, LLC (“PNC”) related to our ERP implementation. The first note payable was issued on December 10, 2012 for software licenses and support with a face value of $6.6 million due September 2016 with fixed quarterly payments of $0.4 million, including stated interest at 2.63%. The second note payable was issued on March 25, 2013 for software maintenance and consulting services with a face value of $3.1 million due September 2016 with fixed quarterly payments of $0.2 million, including stated interest at 2.45%. The third note payable was issued on June 25, 2013 for software maintenance and consulting services with a face value of $2.4 million due March 2017 with fixed quarterly payments of $0.2 million, including stated interest at 2.79%.

 

Revolving Credit Facility

 

On June 12, 2013, we entered into a Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment”) with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders, pursuant to which certain terms of the Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) dated December 16, 2011, were amended. The Second Amendment, among other things, amends certain restrictive covenants to be more favorable to the Company, including the leverage ratio.

 

As of June 30, 2013 and December 31, 2012, we had no outstanding borrowings under the Credit Agreement. As of June 30, 2013 and December 31, 2012, we had issued and outstanding letters of credit of $7.0 million and $6.4 million, respectively, which were reserved against the borrowing base under the terms of the Credit Agreement. As of June 30, 2013, we were in compliance with all restrictive financial and other covenants under the Credit Agreement.

 

9. SHARE-BASED COMPENSATION

 

Options granted generally vest over four years with the first year vesting on a cliff basis followed by monthly vesting for the remaining three years. Restricted stock awards (“RSA”) and restricted stock units (“RSU”) granted generally vest over three or four years depending on the terms of the grant. Share-based compensation expense is recognized on a straight-line basis over the applicable vesting period and is recognized in the ‘Cost of sales’ and ‘Selling, general and administrative expenses’ line items in the condensed consolidated statements of income. During the three months ended June 30, 2013 and 2012, $4.0 million and $4.0 million, respectively, of share-based compensation expense was recorded of which $0.2 million and $0.6 million, respectively, was recorded in ‘Cost of sales’, with the remaining amounts recorded in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of income. During the six months ended June 30, 2013 and 2012, $7.5 million and $6.1 million, respectively, of share-based compensation expense was recorded of which $0.1 million and $1.0 million, respectively, was recorded in ‘Cost of sales’, with the remaining amounts recorded in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of income.

 

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Stock Options

 

The following table summarizes the stock option activity for the three and six months ended June 30, 2013 and 2012:

 

		Three Months Ended June 30,										Six Months Ended June 30,
		2013					2012					2013					2012
Options		Options		Weighted Average Exercise Price			Options		Weighted Average Exercise Price			Options		Weighted Average Exercise Price			Options		Weighted Average Exercise Price
Outstanding at March 31, 2013 and 2012, respectively, and December 31, 2012 and 2011, respectively		2,540,677		$	13.24		3,150,144		$	12.07		2,621,686		$	13.03		3,331,031		$	11.91
Granted		77,500		16.52			72,500		16.16			157,000		15.90			113,900		17.17
Exercised		(106,781	)	7.82			(179,250	)	4.88			(204,090	)	7.05			(285,444	)	5.36
Forfeited or expired		(141,311	)	16.00			(68,781	)	17.63			(204,511	)	16.81			(184,874	)	16.20
Outstanding at June 30		2,370,085		$	13.42		2,974,613		$	12.48		2,370,085		$	13.42		2,974,613		$	12.48

 

Restricted Stock Awards and Units

 

From time to time, we grant RSAs and RSUs to our employees. Unvested RSAs have the same rights as those of common shares including voting rights and non-forfeitable dividend rights. However, ownership of unvested RSAs cannot be transferred until they are vested. An unvested RSU is a contractual right to receive a share of common stock only upon its vesting. RSUs have dividend equivalent rights which accrue over the term of the award and are paid if and when the RSUs vest, but they have no voting rights.

 

During the three months ended June 30, 2013 and 2012, the Board of Directors approved RSU grants of 0.2 million and an immaterial amount of shares, respectively, of which immaterial amounts were granted to certain executives as part of our performance incentive program. During the six months ended June 30, 2013 and 2012, the Board of Directors approved RSU grants of 1.6 million and 0.9 million, respectively, of which 0.7 million and 0.4 million, respectively, were granted to certain executives as part of our performance incentive program. Half of these performance incentive program grants vest ratably on each of the first three anniversaries of the grant date; 25% will vest upon achievement of certain performance metrics; and the remaining 25% will vest one year from the date upon which certain performance metrics are achieved. If actual performance metrics exceed the targeted performance metrics by a predetermined amount, the executives are eligible to receive up to 200% of the performance-based portion of their award. During the three months ended June 30, 2013 and 2012, $3.0 million and $2.1 million, respectively, of share-based compensation expense related to RSUs were recorded. During the six months ended June 30, 2013 and 2012, $6.0 million and $3.3 million, respectively, of share-based compensation expense related to RSUs were recorded.

 

The following table summarizes the RSA activity for the three and six months ended June 30, 2013 and 2012:

 

		Three Months Ended June 30,										Six Months Ended June 30,
		2013					2012					2013					2012
Restricted Stock Awards		Shares		Weighted Average Grant Date Fair Value			Shares		Weighted Average Grant Date Fair Value			Shares		Weighted Average Grant Date Fair Value			Shares		Weighted Average Grant Date Fair Value
Outstanding at March 31, 2013 and 2012, respectively, and December 31, 2012 and 2011, respectively		327,503		$	13.22		518,346		$	12.00		355,509		$	13.37		571,175		$	11.87
Granted		21,590		16.56			18,813		16.48			21,590		16.56			18,813		16.48
Vested		(61,006	)	12.68			(144,499	)	8.48			(78,212	)	14.57			(179,478	)	8.71
Forfeited or expired		—		—			(9,250	)	12.51			(10,800	)	12.51			(27,100	)	12.51
Outstanding at June 30		288,087		$	13.32		383,410		$	13.53		288,087		$	13.32		383,410		$	13.53

 

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The following table summarizes the RSU activity for the three and six months ended June 30, 2013 and 2012:

 

		Three Months Ended June 30,										Six Months Ended June 30,
		2013					2012					2013					2012
Restricted Stock Units		Units		Weighted Average Grant Date Fair Value			Units		Weighted Average Grant Date Fair Value			Units		Weighted Average Grant Date Fair Value			Units		Weighted Average Grant Date Fair Value
Outstanding at March 31, 2013 and 2012, respectively, and December 31, 2012 and 2011, respectively		2,449,544		$	17.06		1,576,561		$	21.28		1,414,661		$	20.61		711,980		$	23.43
Granted		157,097		15.88			13,500		16.10			1,563,114		15.04			888,559		19.42
Vested		(92,297	)	25.35			(105,241	)	24.48			(286,984	)	22.53			(105,241	)	24.48
Forfeited or expired		(58,330	)	16.89			(19,105	)	21.82			(234,777	)	22.27			(29,583	)	21.27
Outstanding at June 30		2,456,014		$	16.72		1,465,715		$	21.00		2,456,014		$	16.72		1,465,715		$	21.00

 

10. INCOME TAXES

 

During the three months ended June 30, 2013, we recognized an income tax expense of $14.3 million on pre-tax income of $49.7 million, representing an effective income tax benefit rate of 28.8% compared to an income tax expense of $12.3 million on pre-tax income of $73.8 million, representing an effective income tax rate of 16.7% for the same period in 2012. During the six months ended June 30, 2013, we recognized an income tax expense of $20.5 million on pre-tax income of $84.8 million, representing an effective income tax benefit rate of 24.2% compared to an income tax expense of $20.0 million on pre-tax income of $109.9 million, representing an effective income tax rate of 18.2% for the same period in 2012.

 

The increase in effective tax rate compared to the same period in 2012 is primarily the result of a shift of profits from lower tax jurisdictions to higher tax jurisdictions, losses recorded in tax jurisdictions for which no tax benefits are being recorded, and true-ups between accrued taxes and amounts included on statutory tax filings. Our effective tax rates for all periods presented also differ from the federal U.S. statutory rate due to differences between income tax rates between U.S. and foreign jurisdictions. We had unrecognized tax benefits of $27.9 million at June 30, 2013 and $31.9 million at December 31, 2012.

 

11. EARNINGS PER SHARE

 

The following table illustrates the basic and diluted earnings per share (“EPS”) computations for the three and six months ended June 30, 2013 and 2012.

 

		Three Months Ended June 30,						Six Months Ended June 30,
($ thousands, except share and per share data)		2013			2012			2013			2012
Numerator
Net income attributable to common stockholders		$	35,356		$	61,524		$	64,317		$	89,870
Less: income allocated to participating securities		(127		)	(330		)	(243		)	(514		)
Net income attributable to common stockholders - basic and diluted		$	35,229		$	61,194		$	64,074		$	89,356
Denominator
Weighted average common shares outstanding - basic		87,864,761			89,519,166			87,822,911			89,412,872
Plus: dilutive effect of stock options and unvested restricted stock units		972,367			1,094,430			945,162			1,137,091
Weighted average common shares outstanding - diluted		88,837,128			90,613,596			88,768,073			90,549,963
Net income attributable per common share:
Basic		$	0.40		$	0.68		$	0.73		$	1.00
Diluted		$	0.40		$	0.68		$	0.72		$	0.99

 

For the three and six months ended June 30, 2013, approximately 1.5 million and 1.7 million, respectively, options and RSUs in total were not included in the calculation of diluted EPS as their effect would have been anti-dilutive. For the three and six months ended June 30, 2012, approximately 1.5 million and 1.3 million, respectively, options and RSUs in total were not included in the calculation of diluted EPS as their effect would have been anti-dilutive.

 

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